GCC sovereign wealth funds may shun the UK

The Gulf Co-operation Council’s sovereign wealth funds (SWFs) may by and large shun the UK with Brexit becoming a reality, according to the Institute of International Finance (IIF).

Moreover, the UK’s exit from the European Union (EU) would also hit those Gulf Co-operation Council (GCC) companies, which have high exposure to the UK, through multiple channels, the Washington-based entity said.

“A significant portion of GCC’s sovereign wealth funds could move out from the UK to other matured economies (such as the US) and emerging economies,” IIF chief economist (Middle East and North Africa) Garbis Iradian told media yesterday.

In the referendum on Thursday, a higher 51.9% voted to leave the union, while only 48.1% wanted to stay with the grouping, following which British Prime Minister David Cameron resigned.

The SWFs in Qatar, Saudi Arabia, Kuwait and the UAE – which had been active buyers in the British property market, especially in London – have, of late, been reportedly going slow in their activities in the UK on uncertainties over Brexit.

Qatar has made purchases in London such as The Shard, Harrods, Olympics Village and several upmarket luxury hotels. Its SWF Qatar Investment Authority (QIA), which has assets worth $256bn under management globally as per the SWF Institute, still has equity holdings in the UK entities such as Barclays, Sainsbury’s and Canary Wharf.

QIA had in 2015 announced its plans to invest $35bn in the US over the next five years as part of its strategy to enhance its exposure in the US and the wider Americas. The fund, which also plans to invest up to $20bn across Asia in the next five years, recently agreed to buy Asia Square Tower I in Singapore from a US private equity BlackRock for $2.45bn.

Iradian also said Brexit would impact GCC companies that have high exposure to the UK through the exchange rate channel (due to the sharp depreciation of pound) and slower economic activity in the UK and other eurozone countries. Apprehensions are that the growth in the UK is expected to be weaker amid high inflation and that its currency has already fallen 10% to a 31-year low since the results of referendum came out.

There have been apprehensions that the UK interest rates may also increase, which may jack up borrowing costs for those Gulf corporates wishing to secure overseas funds as the domestic liquidity in the region has been on the low due to lower petrodollars.

“The rise in funding costs would be limited because with Brexit a rise in US interest rate for the second of this year is highly unlikely,”

Iradian, however, said, adding while interest rates might increase in the UK, they would remain low in other advanced economies.
The IIF economist is of the view that the impact of Brexit on prices of crude oil will be small as the supply factor is stronger than the demand factor.

“We are now projecting an average Brent oil price of $43 per barrel in 2016. With no Brexit, the average price of oil could have been slightly higher (around $46),” he said.

Expecting Brent to average $45 in the second half of this year compared to $41 in the first half of 2016, Iradian said the revised lower average oil price was due to the projected lower global demand for oil (associated with weaker economic activity in the EU), following Brexit. Source: Gulf Times